If you are looking for a policy that will offer you both a death benefit and cash value, you’d be looking at permanent life insurance. It has lifelong coverage and typically has a cash value component. It’s policy’s cash value appreciates over time, and this can come in handy in paying for a premium or taking out a loan from the insurer.
The death benefit of permanent life insurance is money paid to your beneficiaries in the event of your death. The cash value, on the other hand, is a separate savings component that you may be able to access while you are still alive. This policy spans from the time you buy a policy to the time you pass away, as long as you pay the required premiums.
Difference Between Term and Permanent Life Insurance
Permanent and term life insurance are the two main types of insurance policies and the basic difference between the two is that while permanent insurance lasts your entire life, term insurance lasts for a stipulated period which you choose when you buy a policy. This may be 10, 20 or 30 years.
Features of Permanent Life Policies
The most prominent feature of Permanent life policy is a savings portion referred to as cash value. Cash value accumulates over time as you make regular payments towards your policy (these payments are called premiums). The policy cash value can be typically borrowed against, which accumulates on a tax-deferred basis.
Note, that the cash value differs from the policy’s death benefit. If your life insurance policy is canceled, you will get the accrued cash value. Be it as it may, you could be assessed a surrender charge for cancellation early in your policy, thus you are advised to check first with your agent.
Types of Permanent Life Insurance
Whole Life Insurance: Whole life insurance is the most type of permanent life insurance, according to the Insurance Information Institute (III). This policy’s premiums and death benefit stays fixed for the duration of the policy and has a guaranteed rate of return. This implies that the cash value of a whole life policy is guaranteed to earn a minimum amount of interest. Some whole life insurance also pays out dividends, and you may use these dividends to reduce premiums, get them as cash or leave them to accumulate interest.
Universal Life Insurance: This, offers greater flexibility than whole life policies according to the Insurance Information Institute. A typical example is where universal policies may allow you to increase your death benefit, or reduce your monthly premiums immediately you accumulate sufficient cash value in your policy. Note also that if you use up your cash value by applying it to premium payments, your policy may lapse.
Variable Universal Life Insurance: Variable universal life policies offer an adjustable death benefit and premiums and include a variety of investment options that may help increase the cash value of your policy. Here, III advises, that investment losses can also reduce the policy’s cash value and subsequently, it’s the death benefit.
Indexed Universal Life Insurance: This insurance policy, comes with no fixed interest rate on your cash value, which could increase the potential for greater gains or losses from your investments. Indexed universal life policies also encompass a minimum interest rate guarantee.
Cost of Permanent Life Insurance
As earlier stated, permanent life insurance requires the insurer to pay a death benefit to your beneficiaries so long as all premiums are paid. Thus permanent life insurance rates are significantly higher than those for term life insurance.
Note, that most permanent life insurance policies offer the freedom of allowing you to choose how long you want to pay premiums. Thus you can pay for coverage:
For an entire lifetime (annually or monthly)
A certain number of years (such as 20 years)
Until you get to a certain age (like 65)
In a lump sum payment.